Low growth, high inflation challenges RBA

Australia is struggling in a low growth, high inflation environment, the RBA has claimed.

RBA deputy governor Ric Battellino has commented that the Reserve Bank board has had to balance higher-than-anticipated inflation with slowed economic growth. Battellino said inflation for 2011 is likely to trend higher than was forecast last year, while growth estimates have had to be revised downward amid global economic uncertainty and this year's natural disasters.

"As the year has progressed, the resources boom has strengthened, but the divergence between the mining and non-mining sectors of the economy has increased and the mix of growth and inflation has turned out to be less favourable than expected a year ago – i.e. there has been less growth but more inflation," he told a gathering in Sydney yesterday.

Growth had been hampered both by production slowdowns due to natural disasters and falling consumer sentiment, Battellino indicated. He said global economic growth had slowed noticeably by the RBA's July board meeting.

"In Australia, households remained cautious and the housing market was soft. Also, it now appeared that the slow recovery in coal production would mean that earlier GDP forecasts for 2011 would not be met," Battellino said.

This dwindling growth had stayed the RBA's hand in 2011, Battellino said. However, he said the Bank still remained concerned about inflation, and indicated that devising monetary policy taking into account waning growth and growing inflation would prove a challenge.

"With the recent volatility in financial markets adding to the uncertainty about the economic outlook, it does not look like the challenge will become any easier over the months ahead," he commented.